The Future of Animal Agriculture in North America - Farm Foundation

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The Future Economics of Production, Processing and Marketing 31 Given the current situation detailed above and underlying economic trends, what is implied for the future of the North American livestock industry? Size, Scale and Supply Chains The North American livestock industry is expected to see continued consolidation to fewer and larger firms. For producers and processors with old technology, market prices are expected to cover variable costs, but will likely be inadequate to cover depreciation and other fixed costs. They will continue operating until buildings and equipment need replacement, at which time they may consider other alternatives. For small and modest-size operations, niche markets may provide opportunities. Alternatively, networking with others in a cooperative or other form of alliance may have high payoffs. For small-scale operations, the operating principle is not necessarily to be big, but to look and act big through networks or alliances, obtaining the efficiency and market access benefits of size. There will be increasing emphasis on managing and optimizing livestock supply chains, from genetics to end-users. This approach will improve efficiency through better coordination and quality control throughout the chain, reduce food safety risk, and increase the ability to quickly respond to changes in consumer demands. Retailers will impose consumer preferences on the production process through production specifications, including differentiated or specialized products, such as hormone free, organic or animal friendly. Food safety is a key risk for all segments of the livestock industry. Food products that make people ill, or in a worst-case scenario cause death, can quickly destroy brand value, the most valuable asset of a branded-food product company. Supply chain management using a traceback system, combined with quality-assurance procedures such as Hazard Analysis and Critical Control Point (HACCP), facilitates control of the system to minimize the chances of a food contaminant, or to quickly and easily identify the sources of contamination. Traceability is increasingly a key motivation for controlled origination of raw materials from certified suppliers to implement a supply chain philosophy. The management of livestock production is expected to trend toward more micro-management of specific production sites, specific pens and possibly even specific animals. The motivation will be to minimize costs and enhance product quality, and it will increase the amount of information available regarding what affects animal growth and well-being and product attributes that in turn will be used to refine the system. The supply chain approach will increase interdependence between the various stages in the production/processing/distribution chain. It will encourage producers and other members of the chain to form or join strategic alliances, networks and other linkages to improve logistics, product flow and information flow. Competition will occur in supply chains competing for a share of consumers’ animal protein expenditures, rather than individual firms competing for market share. Supply chain optimization concepts have a significant implication for growth of the livestock industries. In the past, decisions concerning location of production, processing and distribution centers were made in a relatively independent fashion. In the future, this will not be the case. It is unlikely that new processing plants of optimal size to capture economies of scale will be constructed without specific plans for building production systems to supply those plants. Producers are not expected to invest in production capacity without assurance of access to processing plants that can pay competitive prices for their products. The benefits of a coordinated system will result in the development of production-processing centers and the supporting infrastructure as the optimal strategy for growth and expansion of the industry. This strategy will not only influence the geographic location of the industry, but also further increase the interdependence among the segments of the industry. Industry Mobility and Location Decisions One of the most critical issues to shape the structure and location of the livestock industries in the future is storage and utilization of manure and other byproducts from production and processing, and mitigation of air and water pollution from the industry. The Environmental Chapter of this report provides a more detailed discussion of environmental issues, but key factors include: • recycling of animal manure, • processing manure into energy of other productive resources, • technological mitigation of nutrients and odors, and • relocation of the industry to geographic regions where there is more environmental absorptive capacity (lower population density, drier climates, fewer surface waterways, less permeable soils or sufficient crop production), or where there is more willingness to exploit the environment. Until and unless technological fixes to environmental and odor problems occur, this challenge will continue to dramatically affect the size, location and structure of the livestock industry. Investment capital is highly mobile, and capital markets are increasingly efficient at allocating funds to industries and geographic areas exhibiting comparative advantage. There is little reason to believe capital markets will not continue to provide adequate financing for future domestic and international expansion of the livestock and poultry industries.
32 Economics of Production, Processing and Marketing However, lenders are particularly conscious of risk and increasingly impose discipline on their customers to be efficient and utilize the best risk management strategies. This suggests that an increasing proportion of production will occur in integrated production/distribution systems—not only to capture the efficiencies of such a system, but also to reduce risk exposure in market prices, quantity and quality. Consequently, it will be increasingly difficult for traditional independent producers to access adequate funds unless they adopt current technology and use management strategies to reduce their and their lenders’ risk exposure. Technology is also mobile, and technological advances could dramatically alter labor requirements in production and processing. While labor and community issues are discussed in another chapter, the constraint of labor availability in some regions or sectors could be reduced by greater substitution of capital for labor. Production is increasingly automated and sophisticated, including use of electronic monitoring and measuring devices to determine real-time animal product quality characteristics. This information will be useful in rewarding producers for those attributes and in segmenting products into proper categories for efficient distribution to different end-users. The livestock industries will likely face new instabilities and financial risks from factors not previously considered. The increased interdependence that comes with supply chain alliances trades price and quality risk for relationship risk, such as a plant shutdown, contract termination or disease outbreak. There will also be increased variability in feed ingredient prices because of growing competition with the energy and industrialuse markets for corn and soybean products. Globalization brings greater dependency on export markets, which increases instability from exchange rate fluctuations, changing political policies in foreign countries, and weather conditions worldwide. Trade disputes and disease outbreaks will have greater impacts on the North American industry, as demonstrated by the outbreak of foot-and-mouth disease (FMD) in the United Kingdom and the cases of BSE in Canada and the United States. In addition, countries such as Brazil and Argentina are expanding production and exporting animal proteins into the global markets. A major change in North American and world livestock production and distribution is the globalization of ownership and operations of production/distribution firms. Japanese companies have already invested in pork production and processing systems in the United States (Oklahoma, Texas, Wyoming and Indiana). The EU is now encouraging European companies to locate operations in Asia, South America and Eastern Europe. U.S.-based companies have already invested in processing capacity in Canada, Mexico, Brazil, Eastern Europe and Asia. The livestock production/distribution industries are clearly becoming global in scope, not only with product exports and imports, but also with internationalization of production and processing. Today’s technological systems can easily be transferred to other areas of the world, providing an environment where internationally focused livestock firms will likely build capacity offshore. In the future, only a very few livestock firms are likely to dominate world production and processing and will source and sell products globally. In general, relatively low input costs, including feed, combined with modern technology and well-developed input and product markets, institutions and distribution systems, enable North America to be a competitive producer and supplier of quality livestock products. However, North America will be increasingly challenged in commodity production and lower value and quality animal products by Brazil in beef, pork and poultry, and by Australia and Argentina in beef. It will be important for the North American livestock industry to maintain and increase its emphasis on quality attributes and differentiated products to expand its position in the global animal product markets and industries. Environmental and odor problems may be significant deterrents to locating livestock production and distribution systems in various areas of North America. But it is highly likely that much of the expansion in production to meet increasing worldwide demand for animal proteins will be by North American or European integrated production/distribution firms or alliances, regardless of where the production and plants are located. North America cannot rest its competitive case on low cost alone—it must adapt products to specific markets and provide enhanced quality control and health and safety assurances. In summary, the consolidation trend to fewer and larger livestock and poultry operations is expected to continue. The economies of scale in production and processing are significant and will drive the optimal size of the facility, as well as the firm. Firm-level economies will be captured through effective supply chain management that improves cost efficiency and control, food safety and quality, and the ability to respond to consumer demands. Quality concerns will also drive more systemized, micro-managed production and distribution processes to reduce product variability and improve conformance with quality standards and consumer expectations of uniform product attributes. Technology will provide new efficiencies and information to better manage the system. Concerns about food safety and a drive to qualified suppliers and traceback will increase pressures and payoffs of tighter coordination along the production and distribution chain. Successful small to mid-size producers face serious survival challenges in determining how they fit into integrated supply chain structures. Higher revenue may be possible in valueadded niche markets where consumers pay high enough premiums for differentiated products to offset the increased cost
Page 2 and 3: The Future of Animal Agriculture in
Page 4 and 5: Consumer Demand Working Group Helen
Page 6 and 7: Foreword Farm Foundation is a catal
Page 8 and 9: Executive Summary The Future of Ani
Page 20: The Future of Animal Agriculture in
Page 23 and 24: 16 growth in the number of Canadian
Page 25 and 26: 18 Consumer Demand The demand for m
Page 27 and 28: 20 Nutrient loading on farmland fro
Page 30 and 31: Chapter 2 Economics of Production,
Page 32 and 33: Economics of Production, Processing
Page 44 and 45: References Economics of Production,
Page 46 and 47: Chapter 3 Consumer Demand Issues Co
Page 48 and 49: The consumer food demand pyramid, i
Page 50 and 51: devote less time and effort to food
Page 52 and 53: dollar. Many of the retail environm
Page 54 and 55: economies will increase demand for
Page 56 and 57: Information Needs Long term, how wi
Page 58 and 59: Table 1. 2005 Population and Recent
Page 60 and 61: Figure 3. U.S. Meat Consumption Pou
Page 62 and 63: Consumer Demand Issues 55 Figure 7.
Page 64 and 65: Chapter 4 Global Competitiveness an
Page 66 and 67: tariff-rate quota (TRQ) in place on
Page 68 and 69: 2004 EU enlargement is expected to
Page 70 and 71: provide guidelines for animal healt
Page 72 and 73: affordable foods to many developing
Page 74 and 75: With NAFTA, and indeed before, seve
Page 76 and 77: competitors. Economic logic, howeve
Page 78 and 79: Global Competitiveness and Trade 71
Page 80 and 81: Figure 4. World Beef Consumption So
Page 82 and 83: Figure 8. World Poultry Meat Produc
Page 84 and 85: Figure 12. Major Dairy Exporters So
Page 86: Global Competitiveness and Trade 79
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82 and medical professions. This in
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84 produced under specific contract
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86 establishing food safety system
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88 In the United States, FDA, under
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90 Policy Options and Implications
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92 A national structure coordinated
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94 Food Safety and Animal Health Pr
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Chapter 6 Environmental Issues The
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positive and negative externalities
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environmental damage. Climate, soil
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Managing or changing the components
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transportation access and costs; in
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could also be integrated air and wa
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and services. The success of the lo
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Environmental Issues 111 Metcalfe,
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Figure 2. Environmental Issues 113
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Chapter 7 Community and Labor Anima
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Slow economic growth in recent year
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informational hearing, at which com
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An aspect that should not be overlo
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States, FSIR would consider the no-
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• compensate parties harmed by an
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Community and Labor 127 Flora, C.B.
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Community and Labor 129 Senthilselv
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Community and Labor 131 Table 3. Un
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Chapter 8 Animal Welfare Animal agr
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In 2005, the Canadian Pork Council
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voluntary codes of practice are bei
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eak the rules; discipline is far mo
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In the final analysis, economic for
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References Animal Welfare 143 Agra
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Box 1. Animal Welfare Legislation i
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Animal Welfare 147 Box 3. Animal We
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Source: Agra CEAS Consulting Ltd. (
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Chapter 9 A Look to the Future Ther
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safety, animal welfare, process ass
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